Thursday, 5 January 2012

Uncertain times in Hungary

Changes to the constitution in Hungary have provoked protests and critical comment. There have also been concerns about media control. I first became aware of the problem over a year ago, when the Hungarian government effectively abolished the newly established Hungarian Fiscal Council.

As I suggested in a recent post, fiscal councils are a good thing. The webpage I set up for easy links and basic information on the various councils throughout the world was inspired by attending the first ever public conference of virtually all the fiscal councils, organised by George Kopits, then head of the Hungarian Fiscal Council.

The story of the Hungarian Fiscal Council is told in Kopits, G (2011) “International Fiscal Institutions: Developing Good Practices,” OECD Journal on Budgeting, November (an early version of which can be found here.) It was doing its job effectively, which is to ask important but potentially tricky questions about the government’s fiscal plans. The whole idea of a fiscal council is that it should make life difficult for a government that gives insufficient attention to the longer term consequences of its overall fiscal plans. The Hungarian Fiscal Council did not go out of its way to pick fights with the government: it just did its job. Effective abolition came despite widespread protest by the heads of other fiscal councils and academics. Unfortunately that decision now seems part of a trend.

2 comments:

I had lunch with Uncle George on Freedom Square (Szabadsag Ter) in the shadow of Hungary's National Bank back in 2005. Even at that time, George floated versions of oversight which would ultimately culminate in the Fiscal Council.

I was pessimistic about this sort of oversight as it does nothing of itself to align incentives of politicians with those of economists. In the absence of incentives, a body like the Council would come to be viewed as the opposition if it proved inconvenient to party might be in power. The construct George proposed provided no reason for politicians to value the Council's work (other than the thin reed of "duty" or "responsibility"). Better, I thought, to provide a financial incentive for politicians to provide sustainable economic performance. That's what root cause analysis would prescribe.

Notwithstanding, the Fiscal Council was subsequently established, irritated the FIDESZ government, and was duly de-funded and disbanded.

Looking back, I believe my analysis was correct. Hungary could easily be brought back into the civilized fold were some relatively simple incentive plan enacted.

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